Cuts? Hunt has no mandate

In one of the most comprehensive u-turns in British political history, just three weeks after it was launched, Liz Truss’ calamitous economic strategy has been ripped to shreds by new Chancellor, Jeremy Hunt. Barely a shred  of the original plans, laid out on 23 September, remains in place: the cuts to Corporation Tax have been scrapped, the cuts to the basic rate income tax not just paused but postponed “indefinitely”, the cut to higher rate income tax has been scrapped, dividend tax cuts scrapped, alcohol duty cuts scrapped, cuts to self-employed taxes scrapped. 

Most dramatically of all, Truss’ centrepiece announcement, the £150bn Energy Price Guarantee intended to protect households from forecast energy price increases over the next two years, has been radically reduced to just six months. In the few weeks of her premiership, Truss has clung to the price cap promise like a drowning woman – even as all else was dramatically failing, with the pound down, interest rates up, and growth going nowhere, she could always claim to be protecting households from the worst of the cost of living crisis. (Not that households particularly noticed: the typical capped energy bill of £2,500 a year is already double the typical bill of 12 months ago.) With the cap removed, the typical household is now exposed to the possibility of a sudden increase in their bill, next April, to almost £5,000 a year.

The misery doesn't end there. Interest rates had been climbing over the last year, driven by a combination of Bank of England responses to rising inflation and pressure from the US central bank - the Federal Reserve - itself busily cranking up its lending rate. The pound, like other currencies, had been steadily worsening against the dollar as the strains in the world economy started to show. But the mini-budget dramatically worsened both. Even before Kwasi Kwarteng had sat down, the pound was being dumped by currency traders and speculators, unconvinced that the very large tax cuts he set out could be paid for through borrowing. The government’s own borrowing rate shot up shortly after, as those who loan the government money through buying bonds started demanding a higher return on them to reflect a perception of increased risk.

By Monday, notably following a Sunday morning interview when Kwarteng decided to brazen out the crisis by promising more tax cuts to come, the Bank of England was warning that the instability in the markets was threatening British pension funds. These had spent the last decade of very low interest rates developing increasingly complex ways to manage the money they held, typically looking to iron out dramatic changes in the difference between what they had to pay out in pensions, and what they took in as returns on assets. When UK government borrowing rates shot upwards, these complex combinations of financial instruments became unstable  – in turn threatening the solvency of the pension funds themselves. There was a material risk, according to the Bank of England, that pension funds would be unable to pay their pensions. It was forced to promise up to £65bn of support to bond markets for the next few weeks. 

And it was the threatened withdrawal of that support by the Governor of the Bank of England, sparking further market panic on Wednesday last week, that finally broke the Truss government. Kwarteng was sacked on Friday, Hunt appointed, the top-rate tax cut ditched - but Truss’ desultory press conference announcing the changes failed to calm jittery traders’ nerves, the cost of government borrowing once again rising into last weekend. 

The threat of further turmoil as markets opened this week motivated the extraordinary, 6:30am briefing from the Treasury that Chancellor Hunt would be making further announcements during the day. The effect was ( immediate: reflecting the correct belief that Hunt would be ditching the whole Truss programme, rather than going in for half-measures, the pound recovered some of its lost value and government borrowing costs have come down somewhat. By the time of Hunt’s televised announcement and address to Parliament, the “coup” was all but complete; notional Prime Minister Liz Truss was left to sit, dazed, on the House of Commons frontbench as her own Chancellor tore up her programme for government. 

An offence against basic democratic values

It's important to be clear about what has happened. Britain is a weak economy, and has been for many years: by developed world standards it is low growth, low wage, low investment, high debt and – as we are all discovering this winter – has a high dependence on imports for essentials like food and natural gas. For many years it has coasted off its historic strengths, increasingly reliant on the Bank of England to intervene to keep the show on the road: firing up Quantitative Easing in the Global Financial Crisis, jamming interest rates as low as possible during the madness of austerity, promising support after the Brexit vote, and issuing £500bn of new money to help cover the costs of covid.

This dependency has made the Bank increasingly powerful. It demonstrated this power on Wednesday last week when, having effectively rescued pension funds, it used the threat of withdrawing its support – and therefore the threat of financial market chaos – to bring the government to heel. The result is a sharp about turn by the Tory government, now threatening “eyewatering” cuts to public spending over the next few years.

There is no democratic mandate for any of this. Boris Johnson was elected with a huge majority in 2019 on the promise of more investment across the country, and an end to austerity spending cuts. He had already begun to increase public spending in 2019, and raised it again in 2021 – on top of exceptional covid spending. This was nothing like enough to repair the damage of the 2010’s austerity, but it brought the programme to a halt. Spending cuts had, after a decade, become bitterly unpopular.

Johnson was ousted by Tory MPs, and Tory members, by a fairly narrow majority, selected Liz Truss. There was no public, democratic mandate for Truss’ drive for a low tax, low regulation, free market utopia – but at least she had yet to threaten spending cuts in direct opposition to the 2019 Tory manifesto. Replacing her programme with that of Hunt, and the austerity re-treads around him like former George Osborne advisor Rupert Harrison, is an offence against basic democratic values. His is a government formed at the behest of the Bank of England, and financial interests, and his first announcements – appointing an “Economic Advisory Council” consisting entirely of figures from the financial world, the threat of renewed austerity – are entirely consistent with that.

Austerity was a disaster in the 2010s, both socially - as the horrifying figure of 300,000 excess deaths associated with spending cuts tells us - and economically. The mess we are in today is, for the most part, the result of poor economic decisions in the last decade. Had the government invested in, for example, insulating homes properly, rather than cutting support for green spending, we would not be facing such a severe winter crisis. Further cuts will only deepen Britain’s social and economic malaise. Hunt’s government – it is his far more than it is Truss’ – has no democratic mandate for its programme and no right to claim a single penny taken from any public service. Even before April next year, when the promised support for energy bills expires, it is likely to have faced tremendous social and political headwinds. It is unlikely to stay the course.